Dr. Hani Hashim Shawa: 1942-2007 - Bank of Palestine · Dr. Hani Hashim Shawa, who passed away in April of last year and whom we greatly miss. Dr. Shawa played a pivotal role in leading

47th Annual Report

He was a visionary Chairman and an inspiration to us all.May God Have Mercy Upon Him

In MemoriamDr. Hani Hashim Shawa: 1942-2007

Table of Contents

Board of Directors ....................................................................................................... 5

Executive Management .............................................................................................. 6

Chairman’s Statement ................................................................................................ 8

Vice Chairman & General Manager’s Statement .................................................... 9

Annual Report of the Board of Directors .............................................................. 10

Financial Highlights .................................................................................................. 11

Recommendations of the Board of Directors ....................................................... 16

Organizational Chart ............................................................................................... 17

Auditors’ Report ....................................................................................................... 18

Financial Statements ................................................................................................ 20

Notes ......................................................................................................................... 24

Branches’ Network ................................................................................................... 54

5

Board of Directors

Members

Dr. Awni M. Skaik

Mr. Maher J. Farah

Mr. Salah S. Al Saqa

Dr. Hani H. Nijm

Mr. Reyad A. Zimmou

Mr. Mamon A. Abu Shahla

Mr. Faysal G. Shawa

Mr. Tareq T. Al Shaka’a

Mr. Mohammed M. Hirbawi

ChairmanMr. Youssef M. Nijm

Vice ChairmanMr. Hashim Hani Shawa

6

Executive Management

General Manager

Mr. Hashim Hani Shawa

Deputy General Manager

Mr. Alaa` M. Al Redwan

Assistant General Manager

Mr. Rushdi M. Ghalayini

Assistant General ManagerForeign Relations

Mr. Ihsan K. Shausha’a

Assistant General ManagerFinancial Affairs

Mr. Salman M. Qemailah

Executive Manager

Mr. Wael A. Al Sourani

Regional Manager

Mr. Hani S. Nasser

Legal Adviser

Mr. Khamis F. Asfoor

7

Our VisionWe seek to be an outstanding financial institution operating through the region.

Our MissionBank of Palestine PLC is a leading financial institution that strives to raise the standard of banking services and works towards maintaining technological advances in the banking sector. The bank participates in the development process according to international standards of best practice.

Our Goals

To achieve a progressive increase in our share of the Palestinian banking sector.

To provide full quality banking and financial services.

To keep abreast of world banking and financial technological advances for the benefit of our customers.

To contribute to the development of our community.

To work for the continuous improvement of the bank’s administrative and professional capabilities.

8

Dear Shareholders,I am delighted to welcome you and present to you our Annual Report together with the Balance Sheet and Income Statement for the year 2007.

I would like to begin by remembering our late chairman Dr. Hani Hashim Shawa, who passed away in April of last year and whom we greatly miss. Dr. Shawa played a pivotal role in leading this outstanding economic institution to its present prosperous and successful status. His visionary policies continue to inspire us today.

We must acknowledge Dr. Shawa’s entrepreneurship, generosity and philanthropy. He was a leading donor in social and cultural welfare, a key Palestinian economic figure and a leader of a national institution that we are all proud to be associated with.

2007 was a year full of challenges and changes, marked by political conflict and the siege of the Gaza Strip. In spite of this, the Palestinian banking sector has stood firm in the face of adversity; adopting wise policies to insure the continuous availability of banking services to all Palestinians.

In light of the direct negative consequences of events to several economic sectors, and the rise of unemployment rates to unprecedented levels, international support for the Palestinian National Authority has not wavered but, rather, has been reaffirmed after the Paris Economic Conference.

The net profit after tax in 2007 was USD 20,579,398: an increase of 48.01% compared to the performance of the bank in 2006. In addition, shareholders’ equity has increased by 60.38% to reach USD 90,218,428: a testimony to the success of our banking policies and initiatives, and to our ability to adapt to change and capitalize on available opportunities to achieve our goals

- not least with your support and encouragement.

In accordance with your interest in increasing the bank’s capital, the Board of Directors has recommended the distribution of the year’s retained earnings -which amounted to USD 17,564,193- in the form of shares - to be distributed amongst shareholders according to the percentage of their ownership of paid capital.

With regards to our ongoing strategy for expanding our network, Bank of Palestine retains a leading position in the number of branches and sub-branches. This year saw the opening of a new branch-building in Ramallah, also hosting the Head Office of the General Management. Additionally, the Jenin branch was relocated to a larger site to cater for its customers’ growing needs, and a sub-branch was also opened in Dura-Hebron. Lastly, a construction project was launched to build a new branch in Nablus city (on land that was purchased during the year) in a strategic spot in the city center.

2007 also saw the establishment of Al Wasata Securities Co. - the investment arm of Bank of Palestine. With over a year in operation, the firm has already experienced a healthy and steady growth, with plans to launch another branch in Ramallah.

Our plans are ongoing to enhance the effectiveness and efficiency of our employees, and to improve the quality of our services through developing expertise. These plans are implemented by providing employees with training courses at the bank’s training center, in addition to courses at specialized institutions both locally and abroad.

In conclusion, I would like to thank you and our valued customers for their trust, which we highly appreciate. I would also like to thank all our staff members for their efforts and dedicated work which have contributed to the prosperity and growth of the first national bank.

Despite a year of economic and political strain, Bank of Palestine continues to prosper and diversify; through the efforts of its resilient and dedicated staff, and with much credit to the visionary leadership of Dr. Hani Shawa - whom we commemorate this year with much respect and appreciation.Youssef Mahmoud Nijm, Chairman

9

Dear Shareholders,Since assuming the post of General Manager after the untimely passing away of my father, Dr. Hani Shawa, and in keeping with his progressive and pioneering vision, I have been working side by side with the dedicated staff of Bank of Palestine to further improve and develop our banking services in order to meet the expectations of our valued customers and shareholders.

I would like to share with you highlights of the Bank’s achievements to date.

We have worked on expanding our branches’ network to provide as many customer services as possible. The bank now has 30 branches and sub-branches, maintaining its position as the most widespread in Palestine.

In accordance with the bank’s improvement and development policy, Internet Banking was made available to our valued customers, in addition to other electronic service packages, such as SMS services to mobile phones and automated phone - banking.

As of last year, we have begun issuing ‘Smart’ Credit and Debit cards. These ICC’s (Integrated Circuit Cards) contain chips that store all the customer data in an encoded form, thus providing an unprecedented level of security and flexibility for transactions. Bank of Palestine is one of the first banks in the Middle East to use this technology.

In order to guarantee the continuous availability of our services to customers across our network, an IT system was installed at the Head Office of The General Management in Ramallah to work in parallel with its counterpart in Gaza - as a backup substitute in emergency cases.

In 2007, the total number of customers’ deposits in banks operating in Palestine was USD 4.98 billion. The total number of deposits in Bank of Palestine during the year was USD 0.682 billion, representing 13.70% of the market share in Palestine. This year, the total number of credit facilities offered by all banks to customers in Palestine came to USD 1.75 billion, giving Bank of Palestine a market share of USD 0.248 billion with a percentage of 14.16% of total credit facilities in Palestine. Moreover, the total assets of Bank of Palestine at the end of December 2007 reached 12.30% of the total assets of all the banking sector in Palestine.

The prevailing economic and political situation has led us to be cautious in providing credit facilities, which is considered a deviation from the bank’s approved plan. Consequently, it was important to compensate by investing in new types of assets that yield good returns at low risk: e.g. hedge funds, bonds, and treasury bills, which have realized a good return as can be seen in the Financial Statements.

Strengthening our relationships with our overseas correspondent banks has also been a priority due to the positive impact they have in supporting our banking services.

Finally, I would like to thank the chairman, the members of the Board of Directors and the shareholders for their great and valuable trust in me. I would also like to thank our valued customers and all our staff members in this prosperous national institution for their hard work and loyalty which we are all proud of.

2007 proved to be a year of successful implementation of Bank of Palestine’s vision towards expansion and modernization. With new branches and new services, we look forward to yet another year of healthy growth.

Hashim Hani Shawa, Vice Chairman & General Manager

10

For the financial year ending 31 December 2007, submitted to the annual ordinary meeting of the General Assembly held at Bank of Palestine building, Gaza, and via video conference with the General Management Head Office in Ramallah at 10 am on Friday 25 April 2008.

Dear Shareholders,

We are honored to present to you our Annual Report for the year ending December 31, 2007.

Unfortunately the year 2007 saw conflict between the Palestinian political factions and further violence has been inflicted on the Palestinians by the Israeli occupation. The occupation has tightened its siege even further, crippling all aspects of life by impeding humanitarian aid, decreasing fuel and electricity supplies, closing the crossings and preventing the entry of bank notes to the Gaza Strip. This deteriorating situation has harmed different economic sectors, especially in the Gaza Strip. All these deplorable events have directly affected the banking sector in Palestine.

Despite the deteriorating economic and security situation, Bank of Palestine was able to face obstacles thanks to its flexible policies and development initiatives. Our plans for expansion continue unhindered with the opening of the Head Office of the General Management and a new branch building in Ramallah, the relocation of the Jenin branch to a larger site, and the launch of a new sub-branch in Dura-Hebron. Also under way is a construction project for the new branch in Nablus city center: a six-floor building located on a plot of land owned by the bank. Finally, a vacant plot in the city center of Hebron was purchased to build a new branch.

As for the Balance Sheet and Income Statement, total assets increased to reach USD 847,650,800 and shareholders’ equity increased to USD 90,028,428 as against USD 56,252,148 the previous year. The net profit after taxes amounted to USD 20,579,398 with an increase of 48.01% from USD 13,903,924 in 2006. This performance is attributed to the cautious decisions and policies exercised by Bank of Palestine, and the trust of the public who continue to support this leading economic institution.

We are pleased to present to you the results for the year ended December 31, 2007, and wish to take this opportunity to assure you that we will do our utmost to achieve the goals we have set for the growth of this bank.

Annual Report of The Board of Directors for the 47th Year

11

Total of Assets and Liabilities

The total assets and liabilities together with shareholders' equity amounted to USD 847,650,800 as compared to USD 602,555,347 in the previous year. The increase of USD 245,095,453 amounting to 40.67% is attributed to the concentrated efforts that were made in improving our branch network to serve our existing customers and attract new customers.

Profit and Loss

Total revenues for the year 2007 amounted to USD 45,854,470 as compared to USD 34,795,155 in 2006. The net profit for the year was USD 20,579,398 after deducting expenses and taxes. It was USD 13,903,924 in the previous year.

Capital and Reserve

Our authorized capital is USD 100,000,000 divided into 100,000,000 shares with a par value one dollar per share. Our current paid-up capital is USD 59,769,737. The statutory reserve is USD 7,730,896 after adding USD 2,068,553 from the profit. The total shareholders’ equity is USD 90,218,428 with an increase of USD 33,966,280.

Credit Facilities

Bank of Palestine continued in the year 2007 to provide credit facilities to various economic sectors. The prevailing political and economic situation led us to concentrate our credit facilities to the most secured sectors. The net credit facilities given in the year 2007 amounted to USD 243,587,513.

Deposits

The total deposits amounted to USD 737,304,804 with an increase of USD 210,116,676 as compared to USD 527,188,128 in the previous year, which represents an increase of 39.856%. The large increase is the result of our expanding network of branches across Palestine and reflects depositors’ trust in the bank.

Progress of total assets in the last 5 yearsUSD

Progress of shareholders’ equity during the last 5 yearsUSD

Progress of deposits during the last 5 yearsUSD

Annual Report of The Board of Directors for the 47th Year Financial Highlights

12

Jenin Branch

2007 was noteworthy for the continuous expansion of our branches’

network, now boasting 30 branches and sub-branches across the

nation, and making Bank of Palestine the most widespread bank in

Palestine. The Head Office of the General Management and Ramallah

new branch building was launched on February 24, 2007, the Jenin

branch on May 12, and the Dura- Hebron sub-branch on July 2. A new

construction project is under way to build a six-storey branch on land

owned by the Bank in a vital area in Nablus City center.

Nablus Branch Model Head Office of the General Management: Ramallah

Nablus Branch Model

Launch of Jenin Branch

New Branches

13

Bank of Palestine now issues 'Smart' Credit and Debit cards. This technology is considered the latest IT innovation in the card industry, providing its holder with unprecedented security. Using embedded integrated circuits, these cards can store encoded information about the account holder. In this respect, Bank of Palestine is considered a pioneer: being one of the first banks in the Middle East to introduce these cards.

In line with our policy of striving to keep up with the latest technological innovations and development, internet banking has become available to our customers, in addition to other electronic services packages, such as SMS service to mobile phones and automated phone-banking, keeping customers in touch with their accounts at all times.

Furthermore, we continue to providing merchants and shops with electronic Point of Sale (P.O.S) machines - solely distributed by Bank of Palestine. The number of P.O.S machines totals to 1248 units, and the number of Automated Teller Machines (ATMs) has reached 42 units distributed across a wide geographical area.

Bank of Palestine was awarded the Quality Recognition Award for the fifth year running by our correspondent bank for fast and mistake-free Dollar Clearing.

With regards to marketing activities aimed at attracting deposits, we have launched the largest campaign in Palestine in the Saving Deposits Program in December of 2007 titled “Save With Us Today & Profit Every Day’’. The campaign’s strategy of distributing prizes daily, monthly, and yearly received a positive response from its audience: saving deposits increased in the second half of December 2007 by 6.19% (equal to USD 7,894,598). The total number of saving deposits amounted to USD 135,334,313 at the end of the year 2007 and continues to grow.

Human Resources

The Human Resources Division has been active during the year in recruitment and training. The number of our staff has increased to 695 employees. This increase was essential to meet the expansion of our branch network in the West Bank and Gaza Strip.

The Training Center

The training center was established in November 2004 with the aim of improving the performance and capabilities of employees, in addition to preparing future management within the proper framework of the bank’s policies and objectives. The center holds special orientation and training courses for new employees, and provides various internal workshops focusing on banking systems and procedures. During 2007, Bank of Palestine held 60 workshops in different areas, such as banking transactions, banking management, and managerial and supervisory skills.

858 employees benefited from the center’s activities during the year 2007.

Other Achievements

14

Al Wasata Securities Co.

Bank of Palestine established Al-Wasata Securities Co. brokerage firm at the end of January 2007, with a capital of USD 3,560,000 - of which the bank owns 87%. Al Wasata Securities Co. is a licensed member of the Palestine Stock Exchange. The firm succeeded in its first year in attracting around 5,000 new investors. It ranked the first amongst other operating brokerage in the number of accounts opened. It is one of the first firms to offer e-trading services for its investors in the Palestine Stock Exchange

through its secured and advanced software, providing investors with all the necessary information to make investment choices. E-trading services enable investors to trade their stocks and monitor the market directly and effectively. The company is in the process of finalizing arrangements to open a branch in Ramallah.

2000 Investment Company Ltd

2000 Investment Company Ltd was registered on January 13, 1999 with an authorized capital of USD 500,000 and paid-up capital of USD 100,000. The total shareholders’ equity is USD 171,850 and is wholly owned by Bank of Palestine. The Board of Directors is now studying options to activate the operations of the company in the real-estate investment field.

Affiliated Companies

15

Charitable Donations:Since its founding Bank of Palestine has maintained a firm tradition of supporting the community through charitable donations. In 2007, the total charitable donations amounted to USD 79,382. Residents of Nahr El-Bared Refugee Camp in Lebanon received USD 50,000.

BOP is also an active sponsor of education and sports: USD 8,800 was donated to support various sport activities in both Gaza Sport Club and Hebron Youth Club. The remaining amount was distributed to various charity organizations and municipal boards in the West Bank and Gaza Strip.

Our Plans for 2008 :

1. Improving our savings and deposits programs to increase our deposits’ market share.

2. Providing credit facilities to new economic sectors to increase our market share.

3. Continuing the expansion of our branch network to remain the most widespread bank in Palestine.

4. Developing employees’ skills and enhancing their performance by endorsing suitable training plans.

5. Providing new banking services and improving existing services in order to meet the expectations of our valued customers.

6. Opening a new branch of Al-Wasata Securities Co. - the investment arm and a subsidiary firm of

Bank of Palestine - in the West Bank.

Trading Activities in 2007:

The number of shareholders on December 31, 2007 was 3690. Mrs. Mahdiya Youssef Shawa is the only shareholder owning more than 5% of capital : 4,749,659 shares equal to 7.94% of capital. The following tables present the trading activities of Bank of Palestine PLC share (BOP) during the year 2007 in Palestine Stock Exchange:

Description Value Ranking

Number of Traded Shares 50,185,887 2

Value of Traded Shares in USD 209,641,495 1

Number of Executed Trades 25,434 2

Share Turnover Ratio 83.97% 2

Number of Trading sessions the Share was traded 248 1

Closing Price 3.10 USD

Highest Trading Price 6.30 USD

Lowest Trading Price 2.73 USD

Data obtained from the Palestine Stock Exchange (PSE).

16

Recommendations of the Board of Directors

Approval of the contents of the Annual Report of the Board of Directors and the discharge of the Board of any liability for the year 2007.

Discussion and approval of the Financial Statements for the year 2007, and the Board’s recommendation to distribute the net profits amounting to USD 17,564,193 for the day 24/04/2008 in the form of shares to shareholders proportional to their ownership of paid capital.

Approval of the Auditor's Report and the appointment of an auditor for the financial year 2008 and appropriating the Auditor's remuneration, or alternatively authorizing the Board of Directors to do so.

Approval of the membership of Mr. Hashim Hani Shawa to the Board of Directors.

ConclusionOur promising growth in 2007 assures the solid mutual trust with our valued customers. We promise you and our customers further success and development. We would also like to thank all our customers for their loyalty, support, and infinite trust. Finally, we thank and appreciate all the efforts of our dedicated staff members for their hard work and continuous commitment. We also extend our greetings to our Palestinian National Authority headed by our leader President Mahmoud Abbas.

Board of Directors

17

Organizational Chart

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18

Independent Auditor’s Report

To the ShareholdersBank of Palestine P.L.C (Public Limited Company)

Report on the consolidated Financial Statements

We have audited the accompanying consolidated Financial Statements of Bank of Palestine P.L.C (Public Limited Company)- /note (1), which comprise of the consolidated Balance Sheet as at December 31, 2007, the consolidated statements of income, changes in shareholders’ equity and cash flow for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s responsibility for the consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS). This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated Financial Statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

19

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated Financial Statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements plan and perform the audit to obtain reasonable assurance whether the consolidated Financial Statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated Financial Statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated Financial Statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated Financial Statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank of Palestine’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated Financial Statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated Financial Statements give a true and fair view of the financial position of Bank of Palestine P.L.C (Public Limited Company)- as at December 31, 2007, its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Other matters

Without qualifying our opinion we draw attention to the followings:

In addition to what is mentioned in Note 9 to the Financial Statements whereas circular (93) of the Palestine Monetary Authority (PMA) requires providing for bad debts, including the facilities extended to the public sector employee, according to certain provisioning criteria while the management of Bank of Palestine does not consider that circular relevant to delinquent portions of loans and advances extended to the public sector employees’ (note 9).

In addition to the provisions booked for taxes, the bank has provided additional provision in the amount of USD 4,423,599 for the years which have not been settled in final with the tax authorities. In determining the value of the additional provision for tax, Bank of Palestine considered the Presidential Decree issued during the year 2007 through which an exemption was granted to the entities and individuals working in the South Governorates (Gaza Strip), and based on the opinion of its legal advisor (refer also to Note (19) to the Financial Statements.)

Saba & Co. Gaza , March 17, 2008

20

2007 2006

USD

Assets Notes

Cash on hand and at Palestinian Monetary Authority (PMA) 4 125,728,801 68,151,485

Balances at banks and financial institutions 5 359,701,596 230,587,351

Trading financial assets 6 3,264,380 3,151,839

Available for sale financial assets 7 10,046,262 ---

Held-to-maturity investments 8 74,054,465 15,346,968

Credit facilities – net 9 243,587,513 260,492,883

Investment in affiliated company 10 --- 1,550,000

Investment in real-estate 11 1,237,685 1,237,685

Property and real-estate – net 12 24,571,510 15,934,485

Other assets 13 5,458,588 6,102,652

Total assets 847,650,800 602,555,348

Liabilities and shareholders’ equity

Liabilities

PMA’s balances and deposits 14 52,283,342 43,864,479

Banks’ and financial institutions’ balances and deposits 15 5,387,800 2,502,617

Customers’ deposits 16 649,162,264 452,331,575

Cash margins 17 30,471,398 28,489,457

Miscellaneous provisions 18 4,150,753 3,217,625

Provision for taxes 19 7,319,500 4,382,393

Other liabilities 20 8,657,315 11,515,054

Total liabilities 757,432,372 546,303,200

Shareholders’ equity

Authorized capital 100,000,000 50,000,000

Paid – up capital 21 59,769,737 36,299,146

Paid in capital in excess of par value 650,066 ---

Treasury stocks 22 --- (179,070)

Compulsory reserve 23 7,730,896 5,662,343

General banking risks reserve 24 3,999,138 3,999,138

Accumulated effect of change in fair value 7 63,187 ---

Minority interest 441,211 ---

Retained earnings 25 17,564,193 10,470,591

Total shareholders’ equity 90,218,428 56,252,148

Total liabilities and shareholders’ equity 847,650,800 602,555 ,348

Contra accounts 26 59,429,743 59,085,852

The accompanying notes form an integral part of these consolidated Financial StatementsThe Financial Statements were approved by the Board of Directors and signed on its behalf by:

Hashim H. ShawaYousef M. NijmVice Chairman: Board of DirectorsChairman: Board of Directors

Consolidated Balance SheetAs of December 31, 2007

21

Consolidated Income StatementFor the year ended December 31, 2007

2007 2006

USD

Revenues Notes

Interest and commissions

Interest income 27 36,290,450 30,581,567

Interest expense 28 (9,198,185) (6,886,834)

Net Interest Income 27,092,265 23,694,733

Net commissions income 29 8,426,024 6,887,612

Total interest and commissions 35,518,289 30,582,345

Revenues other than interest and commissions

Gain on foreign currency exchanges 4,269,500 1,907,983

Loss from trading financial assets 6 (206,944) (972,947)

Loss from available for sale financial assets 7 (262,116) ---

Releases from provision for impairment of credit facilities 9 --- 721,560

Releases from postponed interest 9 1,601,512 1,401

Gains from investments in securities 30 1,954,964 433,884

Other income 31 2,979,265 2,120,929

Total revenue other than interest and commissions 10,336,181 4,212,810

Total revenues 45,854,470 34,795,155

Expenses

Employees benefits 32 (10,236,073) (8,286,269)

VAT on salaries and wages (912,147) (1,118,297)

Depreciation and amortization 12 (1,860,531) (1,504,482)

General and administrative expenses 33 (4,989,849) (4,027,715)

Loans written off (500,971) (332,522)

Provision for doubtful credit facilities 9 (2,351,902) (634,314)

Total expenses (20,851,473) (15,903,599)

Net profit for the year before tax 25,002,997 18,891,556

Provision for taxes 19 (4,423,599) (4,987,632)

Net profit for the year 20,579,398 13,903,924

Attributed to:

Bank of Palestine shareholders 20,588,187 13,903,924

Minority interest- Al Wasata Securities Co. (8,789) ---

20,579,398 13,903,924

Earning per share 34 0.34 0.38

The accompanying notes form an integral part of these consolidated Financial Statements

22

Consolidated Statement of Changes in Shareholders’ EquityFor the year ended December 31, 2007

Paid - up capital

Treasury stocks

Paid in capital in excess of par value

Compulsory reserve

General banking risks

reserveProposed dividends

Accumulated effect of change

in fair valueMinority interest

Retainedearnings

USD

Balance at December 31, 2005 24,693,296 --- --- 4,271,951 2,949,901 11,605,850 --- --- 78,413

Dividends paid for the year 2005 11,605,850 --- --- --- --- (11,605,850) --- --- ---

Treasury stocks --- (179,070) --- --- --- --- --- --- ---

Loss from sale of treasury stocks --- --- --- --- --- (376,921)

Net profit for the year --- --- --- --- --- --- --- --- 13,903,924

Compulsory reserve --- --- --- 1,390,392 --- --- --- --- (1,390,392)

General banking risks reserve --- --- --- --- 1,049,237 --- --- --- (1,049,237)

Board of Directors remuneration --- --- --- --- --- --- --- --- (695,196 )

Balance on December 31, 2006 36,299,146 (179,070) --- 5,662,343 3,999,138 --- --- --- 10,470,591

Dividends paid for the year 2006 10,469,278 --- --- --- --- --- --- --- (10,469,278)

Treasury stocks --- 179,070 --- --- --- --- --- --- ---

Gain from sale of treasury stocks --- --- --- --- --- --- --- --- 77,522

Net profit for the year --- --- --- --- --- --- --- --- 20,579,398

Loss of minority interest --- --- --- --- --- --- --- (8,789) 8,789

Subscribed stocks 13,001,313 650,066 --- --- --- --- --- ---

Compulsory reserve --- --- --- 2,068,553 --- --- --- --- (2,068,553)

Accumulated effect of change in fair value --- --- --- --- --- --- 63,187 --- ---

Minority interest --- --- --- --- --- --- --- 450,000 ---

Board of Directors remuneration --- --- --- --- --- --- --- --- (1,034,276)

Balance on December 31, 2007 59,769,737 --- 650,066 7,730,896 3,999,138 --- 63,187 441,211 17,564,193


23

Consolidated Cash Flows StatementFor the year ended December 31, 2007

2007 2006

USD

Cash flows from operating activities


Adjustments for:

Depreciation 1,860,532 1,500,042

Loss /(Gain) from sale of property and real estate 35,093 (74,916)

Provision for impairment of credit facilities 2,351,902 634,314

Miscellaneous provisions 933,128 783,005

Provision for taxes 4,423,599 4,989,331

Changes in assets and liabilities

Increase in compulsory deposits at PMA (14,334,733) (6,076,017)

(Decrease) Increase in credit facilities 14,553,467 (29,117,173)

(Decrease) Increase in other assets 644,064 (2,243,446)

Increase in customers’ deposits 196,830,690 73,863,365

Increase in cash margins 1,981,942 10,216

(Decrease) increase in other liabilities (3,892,015) 4,476,056

Net cash provided from operating activities before tax 225,967,067 62,648,701

Income tax paid (1,486,493) (5,496,824)

Net cash provided from operating activities 224,480,574 57,151,877

Cash flows from investing activities

Trading financial assets (112,541) (2,958,562)

Available for sale financial assets (10,046,262) ---

Held-to-maturity investments (58,707,498) (6,546,968)

Investment in affiliated company 1,550,000 (15,396)

Acquisition of property and real estate (10,565,031) (3,153,151)

Proceeds from sale of property and real estate 32,381 200,801

Net cash (used in) provided from investing activities (77,848,951) (12,473,276)

Cash flows from financing activities

Increase in capital 23,470,591 ---

Paid in capital in excess of par value 650,066 ---

Treasury stocks 179,070 (555,991)

Gain from sale of treasury stocks 77,523 ---

Accumulated effect of change in fair value 63,187 ---

Minority interest 441,211 ---

Loss of minority interest 8,789 ---

Dividends paid during the year (10,469,278) ---

Net cash provided from (used in) financing activities 14,421,159 (555,991)

Net increase in cash and cash equivalents – note 35 161,052,782 44,122,610


24

Notes to the Consolidated Financial StatementsDecember 31, 2007

Bank1. and its activity

Bank of Palestine P.L.C, “BOP” was incorporated in 1960 as a limited public shareholding company with a

head office in Gaza city. The registration of BOP was according to companies’ law number (18) of 1929 and its amendments. BOP’s main activities are to practice all different banking activities through its branches spread all over Palestine. It was registered on September 10, 1960 under registration number 563200096 and it is licensed by the companies’ registrar.

On April 15, 2007 BOP’s name was changed by the companies’ registrar from limited public shareholding company to Public Limited Company.

BOP started its activities in Gaza in 1960 and the main activities of BOP according the given license by the Palestinian Monetary Authority (PMA) are to practice all different banking activities through its branches spread all over Palestine.

BOP has 18 branches and 12 offices (sub-branches).

The number of BOP’s employees (Head Office and branches) is 695 as of December 31, 2007 against 635 employees as of December 31, 2006.

Bank of Palestine P.L.C is the parent company of Bank of Palestine P.L.C group which constitutes in additional to BOP of the following:

Al Wasata Securities Co.Al Wasata Securities Co. was established on November 29, 2005 as a private shareholding company, under registration number (56314075) in Gaza, with an authorized capital of 2,000,000 US Dollar at par value of 1 US Dollar per share. On May 13, 2007, the authorized capital was increased after approval of BOP’s BOD by the Securities Co.’s registrar to be 3,560,000 US Dollar and BOP owns 87 percent of the company shares. Al Wasata Securities Co.’s main activities are to deal with financial securities through selling and buying financial securities and ownership transfer.

2000 Investment Co. Ltd2000 INVESTMENT Co. LTD was established on January 13, 1999, as a private shareholding company, under registration number (563130079) in Gaza, with an authorized capital of 100,000 US Dollar divided into 1,000 shares at a par value of 100 US Dollar per share. BOP owns 90 percent of the company shares. BOP’s Board of Directors (BOD) decided in its meeting dated May 25, 2004, to entirely own the company starting from July 1, 2004. The Management of BOP is working on documenting the change in the ownership according to prevailing laws and regulations. The 2000 INVESTMENT Co. acts as the purchasing agent for BOP.

Consolidated Financial Statements

The attached Financial Statements include the Financial Statements for all the branches, offices (sub branches) and the Financial Statements of BOP’s headquarter. These Financial Statements were consolidated after offsetting the intra-company accounts between the mentioned branches and headquarter. In-transit transactions between the mentioned branches and headquarter were presented in other liabilities in the attached Balance Sheet.

The consolidated Financial Statements for the year ended December 31, 2007 were approved by the Board of Directors in their meeting number (270) dated February 10, 2008 before the General Assembly meeting. Those Financial Statements will be approved by the General Assembly in their annual meeting.

25

Summary of significant accounting policies2.

� Basis of accounting

The accompanying consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (IFRS) and banking regulations prescribed by the Palestinian Monetary Authority (PMA), other related regulations and according to historical cost basis except for, available-for-sale investments which are stated at fair value and financial assets/ liabilities stated at fair value in the Income Statement.

The reporting and functional currency of BOP is the US Dollar.

� Basis of consolidation

The accompanying consolidated Financial Statements include assets, liabilities, and results of operations of both BOP and its subsidiaries. The consolidated Financial Statements have been prepared by combining assets, liabilities and results of operations of BOP with those of its subsidiaries and after eliminating intra-company transactions and balances.

The consolidated Financial Statements are prepared for the same financial year of BOP and using the same accounting policies of BOP. If those subsidiaries are applying different accounting policies; then the needed adjustments are made for the consolidated Financial Statements to conform to BOP’s applied accounting policies.

The results of operations of the subsidiaries are reflected in the consolidated Income Statement from the date of owning them, the date on which control over those companies transfers to BOP. The consolidation of the subsidiary companies operations results that have been disposed is reflected in the consolidated Income Statement on the date of disposal, which is the date BOP loses control over the subsidiary companies.

In case of preparing separate Financial Statements for BOP as a separate entity; then investments in subsidiary companies are presented at cost.

The accounting policies applied for the year are the same applied in the previous year except for:

Adoption of new and revised International Financial Reporting Standards “Changes in accounting policies”

BOP adopted the mandatory issuances and revisions to International Accounting Standards and International Financial Reporting Standards.

Moreover, the International Accounting Standards Board issued International Financial Reporting Standard No. 7 (Financial Instruments Disclosure) which replaced International Accounting Standard No. 30 (Notes to the Financial Statements of Banks and Financial Institutions), and amended some disclosure requirements in International Accounting Standard No. 32 (Financial Instruments – Presentation and Disclosure). Moreover, the requirements of this standard are to be applied effective from January, 2007. BOP is considering the impact of IFRS (7) and the new amendment of IAS (1) to determine the expected future impacts on the Financial Statements. In the opinion of BOP’s BOD members, the adoption of the standards and related interpretations will have no material impact on the Financial Statements.

26

Summary of significant accounting policies (continued)

In addition to the mandatory issuances and revisions to International Accounting Standards that BOP adopted, the IFRS 8- operational sectors was issued which recommends revisions to disclosure method on operational sectors. This standard is effective from January 2009. BOP adopted this standard earlier due to the nature of operational sectors and activities that BOP is practicing in Palestine. BOP follows all revisions and interpretations to the outstanding but not effective standards in order to adopt them and determine their impact on the Financial Statements.

Sectors information

Business sector represents a group of assets and operations that jointly share providing products or services - subject to certain risks and returns that differ from other business sectors.

Geographical sector is related to providing products or services in a geographical area with certain economical - environment and subject to risks and returns that differ from other business sectors.

� Credit facilities

Direct credit facilities are financial assets with fixed or determinable payments that BOP gave or possessed and have no market value in active markets.

Credit facilities are presented at cost net of interest and commissions in suspense and provision for impairment of credit facilities.

Interest and commissions are suspended on direct inactive credit facilities according to the Palestinian Monetary Authority instructions. Interests and commissions on bad debt receivables and those with legal cases have been stopped.

According to the Palestinian Monetary Authority instructions specific provision has been taken for inactive credit facilities when it is impossible for the management to recognize receiving the whole or\ and part of the accrued amounts or when there is logical evidence that an event has negatively affected the future cash flows of direct credit facilities.

All receivables are deducted from the specific provision in case of the impossibility of collecting them according to PMA instructions. Any surplus from the provision is transferred to the consolidated Income Statement in addition to all the returned amounts of the written of receivables.

� Trading financial assets

Trading investments outstanding in the stock market are stated at fair value. The difference between the fair value and the cost of those financial assets is recognized in the consolidated Income Statement. Distributed dividends or recognized interest are recorded in the consolidated Income Statement.

� Available for sale financial assets

Available for sale financial assets represents investments in companies stocks (listed and unlisted stocks). For those listed stocks in financial markets; they have market value that shows their fair value and the unlisted stocks in financial markets are presented at estimated fair value according to the methods and considerations shown in fair value section below.

Available-for-sale financial assets are initially recognized at fair value including acquisition costs. They are subsequently re-measured to fair value as of the date of the Financial Statements. Changes in fair value are recognized in a separate account within Shareholders’ Equity. When these assets are fully or partially sold, disposed of, or determined to be impaired, the cumulative gain or loss previously recognized in the Shareholders’ Equity is included in the statement of income. The loss from the impaired value of the debt instruments is reversed when it is objectively evident that

27


the increase in their fair value occurred after the losses had been recognized. Impairment losses from the decline in the value of equity securities can be reversed through accumulated effect of change in fair value.

Income and losses resulting from the foreign exchange of interest-bearing debt instruments are included in the statement of income within available-for-sale financial assets.

Differences in the foreign currency of equity instruments are included in the accumulated change in fair value within Shareholders’ Equity.Earned interest from available for sale financial assets is recorded in the statement of income using actual interest method. The impairment in value is recorded in the statement of income when incurred.Financial assets for which fair value can not be reliably determined are shown at cost. The impairment in value is recorded in the statement of income.

� Held to maturity investments

Held to maturity investments are recorded at the cost of the purchasing point. The premium or discount of issuance from the purchasing date to the due date is calculated by the straight line method basis by using the effective interest method on/for interest. Provisions are made for any decline in the amounts that may lead to not recovering all or part of the original value.

� Investment in affiliated companies

Subsidiary companies are companies where BOP owns more than 50 percent of them and has an effective influence on the decisions made relating to financial and operational policies. For the purposes of issuing unconsolidated Financial Statements for BOP; the investments in affiliated/subsidiary companies are presented at cost.

� Property and real-estate “fixed assets”

Property and real-estate are stated at net cost of accumulated depreciation. Property and real-estate (except for land) are depreciated according to the straight-line method over their estimated useful lives using the following rates:

Year Percentage %

Real Estate 50 2

Computers and Supplies 5 20

Equipment and Furniture From 5 to 16.667 6-20

Vehicles 5 20

When the carrying amounts of property and real-estate exceed their recoverable values, assets are written down, and impairment losses are recorded in the Income Statement.

The useful lives of property and real-estate are reviewed at the end of each year. In case the expected useful life is different from what was determined before, the change in estimate is recorded in the following years, as a change in estimate.

Property and real-estate are disposed when getting rid of them or when no future benefits are expected from usage or disposal.

28

� Investment in real estate

Real estate is presented at lower of cost or fair value on an individual basis. Any decline in the fair value from its net book value is recorded as a loss but the increase is not recorded as a gain, in the case of selling it, the selling result is charged to the Income Statement.

� Fair value

The fair value of quoted financial assets represents the closing price in the stock markets. Unquoted financial assets are valued by the management based on the market value of similar financial instrument or based on the expected collectable value of cash flows, or any relevant data that may lead to determine their fair value.

Estimating methods are used to measure a fair value that reflects market expectations considering market factors, expected risks or benefits when estimating financial assets. When the fair values of certain investments cannot be measured properly, BOP depends on the historical costs or book value cost and if there is impairment in its value; the impairment is charged to the consolidated Income Statement.

� Impairment of financial assets

BOP reviews the values of financial assets on the date of the Balance Sheet so as to determine if there are any indicators of impairment in their value individually or in the form of a portfolio. If such indicators exist, the recoverable value is estimated so as to determine the impairment loss. The impairment amount is determined as follows:

The impairment in the financial assets carried at amortized cost is determined on the basis of the present value of the cash flows discounted at the original interest rate.

The impairment in the available-for-sale financial assets carried at fair value represents the difference between the book value and fair value.

The impairment in the financial assets carried at cost is determined on the basis of the present value of the expected cash flows discounted at the current market interest rate of similar financial assets.

The impairment loss is recognized in the statement of income. With the exception of available-for-sale financial assets, if any, in a subsequent period, the previously recognized impairment loss is reversed through the statement of income to the extent of any surplus in value. The impairment in value of available-for-sale financial assets is recorded in the statement of income when incurred.

� Tax and VAT

Taxes are calculated on the basis of the tax rates prescribed according to the prevailing laws, regulations, and instructions in Palestine.

Accrued income tax and VAT are recorded after deducting paid amounts from the provisions taken for that purpose.

Taxable income is the net income in US Dollar shown in the consolidated Income Statement. Provision for tax consists of value added and income taxes according to tax departments’ requirements.

� Deferred tax assets

Because the management has no assurance of realizing any future benefit from deferred tax asset, no deferred tax asset have been accounted for in the consolidated Financial Statements according to the related accounting standard.


29

� Offsetting

Financial assets and liabilities are offset and reported net in the Balance Sheet only when there is a legally enforceable right to offset the recognized amounts or when BOP intends to settle on a net basis, or to realize the asset and settle the liability simultaneously.

� Provisions

Provisions are recognized when BOP has obligations in the Balance Sheet date that results from previous transactions and are contingent to be payable and can be reliably measured.

� Social insurance provision / End of service indemnity

BOP started providing for such a provision from August 2004 according to the social insurance law no. (3) for the year 2003. The amount of the provision is recorded as a provision until determining who the responsible party for receiving them. End of service indemnity provision balance up to July 31, 2004 was fully settled to the employees. Differences on the end of service indemnity are included in miscellaneous provisions.

� Staff provident fund

BOP contributes 5% of the staff basic salary in addition to a contribution in the same percentage from employees.

� Treasury stock

Treasury stock is presented at cost in the consolidated Balance Sheet as a deduction from equity.

No gain or loss is recognized in the consolidated Income Statement on the sale, issuance, or cancellation of treasury stock. Proceeds from these stocks are presented in the consolidated Financial Statements as a change in equity.

� Financial assets recognition date

Recognizing date of selling or buying financial assets is the date of trading (bank commitment date of selling or buying financial assets).

� Revenue recognition

Interest income and expenses are recognized on the accrual basis except for stock dividends which are recorded when received and except for interests and commissions on bad debt of credit facilities which are suspended until collection.

Commissions and fees are recorded as an income when providing the related services.

� Foreign currency

Foreign currency transactions are recorded during the year at the exchange rate prevailing at the date of each transaction.

Financial assets and liabilities balances denominated in foreign currencies are converted at the average exchange rate prevailing at the date of the Balance Sheet and declared by the PMA.

Non-financial assets and liabilities denominated in foreign currencies and presented at fair value are converted at the date of determining their fair value.

The resultant exchange gain (loss) is reflected in the consolidated Income Statement. Exchange differences for non- monetary assets and liabilities (like stocks) denominated in foreign currencies are recorded as part of change in fair value.


30

� Contra accounts (Memoranda)

Contingent liabilities, which may occur as a result of BOP practicing its normal activities, are recorded as contra accounts and disclosed as an off-Balance Sheet. These accounts include obligations caused by letters of credit and guarantees given to customers.

� Cash and cash equivalent

Cash and cash equivalents is comprised of cash balances with the Palestinian Monetary Authority and balances with banks and financial institutions maturing within three months net of balances due to banks and financial institutions maturing within three months.

Using estimates3.

The Management of BOP, through applying the accounting policies, uses assumptions and estimates with material impacts on the recognition of the balances recorded in the Financial Statements and the contingent liabilities disclosure. Such assumptions and estimates affect the revenues, expenses, provisions and changes in fair values. Furthermore, the management of BOP is required to assess the amount and time of future cash flows of certain balances. Assumptions and estimates are based on hypotheses and other related factors ranging in expectations and uncertainty. The actual results may differ from these assumptions and estimates as a result of changes in future conditions and circumstances.

The management of BOP considers its assumptions and estimates in the Financial Statements reasonable. Summary of these assumptions are as follows:

Provision for taxes is calculated according to applicable rules and regulations in effect in the area,

Provision for social insurance (end of service indemnity) is calculated according to laws and regulations prevailing in the area.

The management periodically re-assesses the economic useful lives of tangible and intangible assets for the purpose of calculating annual depreciation and amortization based on the general condition of these assets and the assessment of their useful economic lives expected in the future. Impairment loss (if any) is taken to the Income Statement.

The management frequently reviews the financial assets stated at cost to estimate any impairment in their values. Impairment loss (if any) is taken to the statement of income as an expense for the year.

Specific provision for doubtful credit facilities is provided for based on the provisioning criteria set by the management and with reference to relevant International Financial Reporting Standards (IFRS) and PMA’s circulation no 93.

Note 2 (Cont.). Note 3

31

Cash on hand and at Palestinian Monetary Authority (PMA)4.

At December 31

2007 2006

USD

Cash on hand 54,842,431 22,191,050

Balances at PMA

Current/ on demand accounts (2,012,022) 6,072,154

Transactions in transit with PMA (506,647) (4,820,017)

Time deposits (maturing within three months) 16,804,561 2,442,553

Compulsory reserve 56,600,478 42,265,745

125,728,801 68,151,485

As of December 31, 2007, no balances were restricted except the compulsory reserve.

According to the PMA’s circular (No. 1 / 2001) dated June 12, 2001 to all banks operating in Palestine, PMA decided the amendment of the compulsory reserve on customers’ deposits. Reserves are calculated monthly based on the followings ratios:

On shekel’s deposits 8%

On other currencies’ deposits 9%

PMA does not pay interest on the above mentioned reserves according to the above mentioned circular.

Balances at banks and financial institutions 5.

At December 31

2007 2006

USD

Balances at local banks and financial institutions

Current/ on demand accounts 790,912 ---

Balances at foreign banks and financial institutions

Current/ on demand accounts 18,915,985 10,478,106

Deposits maturing within 3 months 339,994,699 220,109,245

358,910,684 230,587,351

359,701,596 230,587,351

BOP charges interests on the current accounts at foreign banks with an interest rate less than average deposits interest.

Notes 4, 5

32

Trading financial assets6.

At December 31, 2007 At December 31, 2006

Investedamount

Currentvalue

Loss from trading

financial assets

Investedamount

Currentvalue

Loss from trading financial

assets

USD USD USD USD USD USD

Investments portfolio (local stocks) at Palestine securities exchange

3,471,324 3,264,380 (206,944) 4,124,786 3,151,839 (972,947)

3,471,324 3,264,380 (206,944) 4,124,786 3,151,839 (972,947)

Starting from January 2007, investments portfolio has been transferred to Al-Wasata Securities Co. (subsidiary company). BOP is managing this portfolio via an appointed investment committee.

Available for sale financial assets7.

At December 31, 2007

Invested amount Current value

Accumulated effect of change in fair

value

Unrecognized loss from available for

sale assets

USD USD USD USD

Investment portfolio at HSBC bank 6,000,000 6,063,187 63,187 ---

Investment in bonds at financial market (with unstable return) 4,245,191 3,983,075 --- (262,116)

10,245,191 10,046,262 63,187 (262,116)

Held-to-maturity investments8.

Investments Additional paid

in capital Prepaid interest

USD USD USD

Balance at beginning of the year 15,346,968 110,692 ---

Additions 68,644,027 347,371 761,616

Disposals (9,936,530) --- ---

Transfer to revenue (102,211) (729,841)

355,852 31,775

74,054,465

Investments in the foreign bonds represent debt bonds held-to-maturity investments. The maturity period is ranging between 2008 and 2017 with an average interest rate ranging between 4.80% and 7.83%.

Notes 6, 7, 8

33

Details of these investments are represented in the following:

At December 31

2007 2006

USD

Investment in financial securities circulated at financial markets

Treasury bills and bonds 17,630,465 6,346,968

Fixed rate of return securities 56,424,000 9,000,000

74,054,465 15,346,968

Credit facilities – net9.

At December 31

2007 2006

USD

Overdraft facilities 73,682,676 77,373,539

Overdraft accounts 29,265,446 30,086,997

Loans 153,514,122 157,850,713

Credit cards 4,557,639 6,631,217

Less: 261,019,883 271,942,466

Interest in suspense (9,593,374) (5,897,670)

Provision for doubtful accounts (7,838,996) (5,551,913)

243,587,513 260,492,883

� The above-mentioned credit facilities include loans and overdraft to the Palestine authority’s employees of USD 104,230,699 as of December 31, 2007 against an amount of USD 133,340,441 as of December 31, 2006. According to PMA circulars, such loans are non-performing and they include a sum of USD 31,415,401 due/ uncollected installments as of December 31, 2007 and USD 30,799,495 as of December 31, 2006.

� Loans are stated as net of interest received in advance of USD 667,986 as of December 31, 2007 (against USD 1,262,880 as of December 31, 2006).

� Loans contained an amount of USD 1,057,828 represents an non-residents’ credit facilities as of December 31, 2007, against an amount of USD 1,234,133 as of December 31, 2006.

� PMA’s circulation no. 93 requires providing for bad debts when one or more premiums of the loan principal value or\ and the related interest are not paid for 180-360 days. While the management of BOP consider that circular not applicable to delinquent loans and advances extended to the public sector employees’ (loans and overdraft) with total balance of USD 104,230,699 as of December 31, 2007 and it deals generally with bad debts for all types of facilities. In their opinion (bank management) this circulation doesn’t apply for public sector employees’ facilities portfolio and didn’t provide the needed provision for it. BOP management opinion depends on a detailed study results conducted over the public sector employees’ facilities portfolio in order to provide the appropriate provision in conformity with its expected collection ability according to self evaluation criteria set by BOP. These criteria considered all the objective evidences that impact the ability of those debtors to commit their obligations especially considering the noticeable improvement in the economical conditions subsequent to the Financial Statements date including the PNA commitment to pay the public sector employees’ salaries and accrued balances.

Bank management has suspended all accrued interests on the public sector employees with a total balance of USD 8,700,000 up to December 31, 2007.

Note 8 (Cont.), Note 9

34

Credit facilities classified by currencies

Currency Equivalent

ILS USD JOD EUR JPY USD

Overdraft facilities 205,003,388 19,423,600 417,048 291,697 5,463,884 73,682,676

Overdraft accounts 92,848,081 3,888,544 625,285 --- --- 29,265,446

Loans 472,730 139,775,521 9,653,702 273,995 --- 153,514,122

Credit cards --- 4,557,639 --- --- --- 4,557,639

298,324,199 167,645,304 10,696,035 565,692 5,463,884 261,019,883

Exchange rate 3.854 1.00 0.709 1.4731 111.99

Credit facilities classified by economic sector

At December 31

2007 2006

Credit facilities fields

Credit facilities provision

Credit facilities fields

Credit facilities provision

USD

Palestinian National Authority (Ministry of Finance) 67,109,934 --- 43,882,700 ---

Agriculture 3,007,895 121,597 5,388,386 84,095

Industry and mining 20,111,920 813,044 25,165,215 511,645

Construction 57,709,226 2,332,951 71,330,570 280,123

General Trade 71,447,376 2,888,329 82,311,226 3,334,286

Transportation (including air) 12,710,962 513,852 13,339,894 113,007

Tourist, hotels and restaurants 2,094,873 84,687 2,796,135 303,841

Services 5,335,368 215,678 4,864,110 2,542

Others 21,492,329 868,858 22,864,230 922,374

261,019,883 7,838,996 271,942,466 5,551,913

Credit facilities classified by sectors

At December 31

2007 2006

USD

Public sector 67,109,934 43,882,700

Private sector:

Companies and institutions 37,097,566 33,640,136

Individuals 156,812,383 194,419,630

261,019,883 271,942,466

Note 9 (Cont.)

35

� Non-performing credit facilities according to PMA instructions due to the deteriorating economic conditions amounted to USD 111,340,621 representing 42.65% of the total facilities as of December 31, 2007. This includes the loans to the PA employees in the amount of USD 87,766,142. As of December 31, 2006, the non-performing credit facilities amounted to USD 108,755,342 representing 40% of the total facilities. This includes the loans to the PA employees in the amount of USD 102,540,946.

� Doubtful credit facilities amounted to USD 7,838,996 representing 3% of the total facilities as of December 31, 2007. As of December 31, 2006, the doubtful credit facilities amounted to USD 5,513,252 representing 2.03% of the total facilities.

� Credit facilities lent to the Palestinian National Authority and its institutions were USD 67,109,934 representing 25.71% of the total facilities as of December 31, 2007. As of December 31, 2006, the lent amount was USD 43,882,700 representing 16.13% of the total facilities.

Changes on Provision for impairment of credit facilities

At December 31

2007 2006

USD

Balance at beginning of the year 5,551,913 6,060,798

Charges during the year 2,351,902 634,314

Bad Debt written off (164,372) (536,080)

Releases to Income Statement --- (721,560)

Currency exchange difference – beginning of the year provision 99,553 114,441

7,838,996 5,551,913

Interest in suspense

Movement in this account is as follows:

At December 31

2007 2006

USD

Balance at beginning of the year 5,897,670 945,365

Suspended interests during the year for PA's employees’ loans 5,300,000 5,000,000

Interests released to the Income Statement (1,601,512) (1,401)

Written off suspended interests (60,266) (56,054)

Currency exchange difference-beginning of the year provision 57,482 51,086

Reconciled customer interest --- (41,326)

9,593,374 5,897,670

According to the PMA instructions, charging interest on doubtful debts is ceased for those uncollectible debts for more than 90 days.

Note 9 (Cont.)

36

Investments in affiliated company10.

At December 31

2007 2006

USD

Balance at beginning of the year --- 350,000

Additions --- 1,200,000

--- 1,550,000

Investments in real estate11.

Investment in real estate represents the unoccupied part of BOP General Management Building in Gaza which is comprised of seven floors and part of the fifth floor as follows:

At December 31

2007 2006

USD

Beginning of the year balance 1,237,685 1,132,685

Re-purchasing of apartments --- 105,000

1,237,685 1,237,685

Property and real-estate – net12.

Real –EstateLeasehold im-provements

Computers and Supplies

Equipment and Furniture Vehicles Total

USD

Cost:

January 1, 2007 11,915,818 1,210,719 6,316,274 10,565,541 1,084,650 31,093,002

Revaluation decrease in realestate from previous years (824,126) --- --- --- --- (824,126)

Beginning balance 11,091,692 1,210,719 6,316,274 10,565,541 1,084,650 30,268,876

Additions 5,309,769 165,401 476,706 4,514,862 98,293 10,565,031

Disposal (57,000) --- --- (28,647) (60,000) (145,647)

December 31, 2007 16,344,461 1,376,120 6,792,980 15,051,756 1,122,943 40,688,260

Accumulated Depreciation:

January 1, 2007 (1,779,768) (766,670) (5,030,103) (6,431,056) (326,794) (14,334,391)

Additions (195,982) (180,886) (272,125) (1,063,203) (148,336) (1,860,532)

Disposal --- --- --- 18,173 60,000 78,173

December 31, 2007 (1,975,750) (947,556) (5,302,228) (7,476,086) (415,130) (16,116,750)

Net book value:

December 31, 2007 14,368,711 428,564 1,490,752 7,575,670 707,813 24,571,510

December 31, 2006 9,311,924 444,049 1,286,171 4,134,485 757,856 15,934,485

Notes 10, 11, 12

37

Real estate constituted of:

At December 31

2007 2006

USD

Branches’ buildings 6,629,430 5,693,665

General Management building - Ramallah 2,779,319 ---

General Management building - Gaza- occupied by BOP 2,501,167 2,501,167

Total buildings 11,909,916 8,194,832

Land 5,258,671 3,720,986

Revaluation decrease in real-estate (824,126) (824,126)

16,344,461 11,091,692

Other assets13.

At December 31

2007 2006

USD

Prepaid expenses 470,238 397,732

Interest receivable 2,181,514 1,000,306

Inventory of supplies 815,045 310,847

Cost of branches under construction 411,206 2,452,796

Advance payments to vendors 353,205 1,099,665

Customers’ receivable- Al Wasata Securities Co. 607,752 ---

Other debit balances 619,628 841,306

5,458,588 6,102,652

PMA’s balances and deposits14.

At December 31

2007 2006

USD

Deposits maturing within 3 months 52,283,342 43,864,479

52,283,342 43,864,479

Note 12 (Cont.), Notes 13, 14

38

Banks’ and financial institutions’ balances and deposits 15.

Banks’ and financial institutions’ balances and deposits were USD 5,387,800 as of December 31, 2007 and USD 2,502,617as of December 31, 2006. These deposits mature within 3 months.

Customers’ deposits16.

At December 31

2007 2006

USD

Demand and current deposits 307,713,401 207,746,628

Saving deposits 138,734,225 93,188,220

Time and notice deposits 195,188,415 142,400,791

Debit accounts- temporary credits 7,526,223 8,995,936

649,162,264 452,331,575

Customers’ deposits classified by currencies as of December 31, 2007

CurrencyOther

currency Equivalent

ILS USD JOD EUR USD USD

Demand deposits 468,105,070 122,904,464 25,581,666 8,525,637 11,691,564 307,713,401

Saving deposits 90,507,367 69,958,953 31,112,130 956,865 109,252 138,734,225

Time deposits 102,172,364 142,360,982 18,658,540 6,800,589 321,607 195,188,415

Debit accounts- temporary Credits 9,988,773 7,526,223 161,834 --- --- 7,526,223

670,773,574 342,750,622 75,514,170 16,283,091 12,122,423 649,162,264

Exchange rate 3.854 1.00 0.709 1.4731 1.00


USDAs a proportion of total deposits

USD As a proportion of total deposits

Interest free deposits 318,257,007 48.79 % 217,136,680 48.00 %

Palestinian Authority's deposits 76,247,936 11.69 % 50,590,978 11.18 %

Dormant deposits 30,046,639 4.61 % 28,243,840 6.24 %

Restricted deposits 8,940,952 1.37 % 8,429,792 1.86 %

Notes 15, 16

39

Cash margins17.

At December 31

2007 2006

USD

Cash margins on direct credit facilities 17,594,671 17,000,423

Cash margins on indirect credit facilities 12,298,584 10,886,026

Other cash margins 578,143 603,008

30,471,398 28,489,457

Miscellaneous provisions18.

At December 31

2007 2006

USD

Provision for social insurance / end of service indemnity 2,650,753 1,717,625

Provision for legal cases and employees benefits. 1,500,000 1,500,000

4,150,753 3,217,625

Provision for taxes19.

At December 31

2007 2006

USD

Balance – beginning of the year 4,382,394 4,889,886

Additions during the year 4,423,599 4,987,632

Taxes paid (1,486,493) (5,495,125)

Balance – End of the year 7,319,500 4,382,393

In addition to the provisions booked for taxes, BOP has provided additional provision in the amount of USD 4,423,599 for the years which have not been settled in final with the tax authorities. In determining the value of the additional provision for tax, BOP considered the Presidential Decree issued during the year 2007 through which an exemption was granted to the entities and individuals working in the South Governorates (Gaza Strip), and based on the opinion of its legal advisor. The aforementioned estimate was calculated in connection with the following further facts:

The bases of reconciliations with tax authorities agreed upon in the previous years.

Recent facilities offered by tax authorities in assessing the tax burden of the financial institutions.

The financial profit of BOP usually approximates the taxable profit.

Notes 17, 18, 19

40

Taxes appearing in the consolidated Income Statement represents the following:

At December 31

2007 2006

USD

VAT on the year's net income 2,241,563 2,453,633

Income tax on the year's income 2,182,036 2,533,999

4,423,599 4,987,632

Other liabilities20.

At December 31

2007 2006

USD

Interest payable 744,966 702,921

Accrued expenses 26,450 56,993

In transit items between HQ and branches 601,751 1,379,464

Certified checks 3,082,364 5,063,726

Remuneration for Board of Directors 1,034,276 695,196

Staff provident fund 67,386 1,298,513

Dividends payable 134,319 202,254

Unconfirmed letters of credit 695,937 672,566

Temporary deposits 86,786 853,945

Customers’ payables- Al Wasata Securities Co. 1,111,479 ---

Deductions and other taxes 712,273 298,890

Other credit balances 359,328 290,586

8,657,315 11,515,054

Summary of Staff provident fund movements

At December 31

2007 2006

USD

Balance – beginning of the year 1,298,513 985,709

Bank's contribution 159,692 132,540

Employee's contribution 159,692 132,540

Interest earned on provident fund 70,447 58,939

Terminated employees (78,114) (11,215)

Transfer to the account of provident fund management (1,542,844) ---

Due to be transferred 67,386 1,298,513

The staff provident fund is managed outside BOP’s assets and by an appointed committee of BOP’s employees.

Note 19 (Cont.), Note 20

41

Shareholders’ equity

Paid – up capital21.

The authorized capital was increased to 50,0000,000 US Dollar according to the decision of the General Assembly in its extraordinary meeting number 36 of February 25, 2005, the increase in the capital to be financed by capitalizing the balance of the voluntary reserve and from the profit of the incoming years.

The increase in the capital was approved and registered with related authority. In addition, in the extraordinary meeting of September 2, 2005 the General Assembly decided the followings:

To increase the authorized capital to 100,0000,000 USD and delegate the Board of Directors to capitalize the balance of the voluntary reserve and use the profit of the incoming years as well as making a public offering, if required.

To split the share of USD 16 par value to 16 shares at one dollar each and keeping the same conditions of stock issuance.

To revise article number 12 to Bank of Palestine P.L.C shares to be traded in the Palestinian Security Exchange Market according to dealing procedures of the market regulations.

According to the decision of the General Assembly in its extraordinary meeting conducted on April 6, 2007, and after getting the approval of Palestinian Capital Market Authority; BOP offered 13,000,000 shares for second subscription (only for BOP’s shareholders) with a par value of 1 US Dollar per share and 0.05 US Dollar unredeemed subscription fees.

BOP shares were listed in the Palestinian Security Exchange Market on November 9, 2005.

The movement of Paid – up capital is represented as follows:


USD Shares USD Shares

Authorized share capital 100,000,000 100,000,000 50,000,000 50,000,000

Unpaid amounts (75,306,704) (75,306,704) (28,320,000) (28,320,000)

Paid-up capital 24,693,296 24,693,296 21,680,000 21,680,000

Stock dividends distributed during 2005 11,605,850 11,605,850 3,013,296 3,013,296

Balance as of December 31, 2006 36,299,146 36,299,146 24,693,296 24,693,296

Stock dividends distributed during 2006 10,469,278 10,469,278 11,605,850 11,605,850

Subscribed stocks 13,001,313 13,001,313 --- ---

Balance as of December 31, 2007 59,769,737 59,769,737 36,299,146 36,299,146

Note 21

42

Treasury Stocks22.

During the year ended December 31,2007 December 31,2007 December 31,2006

Balance Sold Balance Balance

Share Share Share Share

Treasury stocks 45,165 (45,165) --- 45,165

USD USD USD USD

Treasury stocks 179,070 (179,070) --- 179,070

Sales of treasury stocks 256,592

Realized gain 77,522

Treasury stocks represent 45,165 shares of BOP at total cost of USD 179,070, and during the year ended December 31, 2007 all the treasury stocks were sold with an amount of USD 256,592. The difference was stated directly in the statement of changes in shareholders’ equity.

Compulsory reserve23.

The yearly appropriation to compulsory reserve is at least 10 percent of the net income after tax. The deduction can not be stopped before the total amount appropriated to this reserve reaches the amount of the capital of BOP. The appropriation to this reserve is made annually.

General banking risks reserve24.

According to PMA instructions, the general banking risks reserve on credit facilities is calculated at 1.5 % of the performing credit facilities and 0.5% of the indirect facilities and this reserve cannot be reduced without PMA pre-approval. The movement in this account during the year is detailed below:

Credit facilities General Banking Risks Reserve

Direct Indirect Direct Indirect Total

USD

December 31, 2007 243,246,626 49,012,173 3,781,907 217,231 3,999,138

December 31, 2006 252,127,148 43,446,141 3,781,907 217,231 3,999,138

Notes 22, 23, 24

43

Retained earnings25.

At December 31

2007 2006

USD

Balance – beginning of the year 10,470,591 78,413


Appropriated to compulsory reserve (2,068,553) (1,390,392)

Appropriated to general banking risks reserve --- (1,049,237)

Stock dividends distributed (10,469,278) ---

Remuneration to BOD (1,034,276) (695,196)

Treasury stock results 77,522 (376,921)

Loss of minority interest- Al Wasata Securities Co. 8,789 ---

Balance – End of the Year 17,564,193 10,470,591

Contra accounts26.

At December 31

2007 2006

USD

Letters of credit 5,089,612 7,515,299

Guarantees acceptances 7,196,559 8,038,261

Letters of guarantee 42,083,085 37,972,182

Unutilized direct credit facilities 5,060,487 5,560,110

59 ،429 ،743 59,085,852

Interest income27.

For the year ended December 31

2007 2006

USD

Credit Facilities:

Current accounts – overdraft 7,633,763 6,426,896

Demand accounts– overdraft 2,980,700 5,629,287

Loans and advances 11,207,848 8,984,378

Credit cards 315,760 630,967

Balances at PMA 145,717 168,250

Balances and deposits at banks’ and financial institutions 14,006,662 8,741,789

36,290,450 30,581,567

Interest income- Loans and advances with an amount of USD 11,207,848 after deducting an amount of USD 5,300,000 as interest in suspense for the year ended December 31, 2007 against an amount of USD 5,000,000 for the year ended December 31, 2006.

Notes 25, 26, 27

44

Interest expense 28.


2007 2006

USD

Banks’ and financial institutions’ deposits 1,891,661 1,618,458

Customers’ deposits:

Current accounts and demand deposits 247,935 356,583

Saving accounts awards 439,759 156,000

Time deposits 6,292,768 4,467,482

Cash margins 326,062 288,311

9,198,185 6,886,834

Commissions income – net29.


2007 2006

USD

Commissions from letters of credit and guarantees 1,798,261 1,681,351

Commissions from bills and loans 1,222,280 1,446,625

Bank transfers commissions 2,120,556 1,592,368

Returned checks commissions 484,474 509,851

Miscellaneous banking services commissions 2,800,453 1,657,417

8,426,024 6,887,612

Realized gains from investments in financial securities30.


2007 2006

USD

Interest earned from Held-to-maturity investments 2,654,403 611,862

Amortization of paid in capital in excess of par value (102,211) (158,311)

Amortization of prepaid interest (729,841) (19,667)

1,822,351 433,884

Distributed dividends- trading financial assets 91,041 ---

Realized gains- trading financial assets 1,952 ---

Gain from available for sale financial assets 39,620 ---

1,954,964 433,884

Notes 28, 29, 30

45

Other revenues31.


2007 2006

USD

Postage 102,783 198,153

Deposits boxes rent 19,510 15,495

(Loss ) Gain from property sold (35,093) 74،916

Credit Cards 1,273,904 1,017,924

Stationery 788,283 671,321

Others 405,846 143,120

Dealing commissions- Al Wasata Securities Co. 411,242 ---

2000 Investment company revenue 12,790 ---

2,979,265 2,120,929

Employees benefits 32.


2007 2006

USD

BankAl Wasata

Securities Co.

2000 Investment Company Consolidated Consolidated

Salaries, bonuses and employees benefits 8,803,104 218,229 37,506 9,058,839 7,398,861

Bank’s share in social insurance -end of services 666,510 --- 2,120 668,630 507,033

Bank’s share in provident fund 230,139 2,535 --- 232,674 191,465

Health insurance 241,354 2,450 --- 243,804 177,682

Provision for staff end of service

indemnity --- 12,480 --- 12,480 ---

Paid staff end of service indemnity 19,646 --- --- 19,646 11,228

9,960,753 235,694 39,626 10,236,073 8,286,269

The salaries account includes the key management executives’ salaries (General Manager and his assistants) in the amount of USD 429,400 for the year ended December 31, 2007 against USD 390,946 for the year ended December 31, 2006.

Notes 31. 32

46

General and administrative expenses33.


2007 2006

USD

BankAl Wasata

Securities Co. Consolidated Consolidated

Telephone and postage 468،650 19,888 488،538 484،982

Rent 365,851 41,310 407,161 359,130

Stationery and printings 466,330 13,446 479,776 400,316

Advertising 586,880 98,009 684,889 246,065

Maintenance 363,473 3,904 367,377 342,644

Electricity and water 335,098 --- 335,098 227,410

Rewards and Eid payments 351,665 --- 351,665 298,616

Charitable work and donations 79,382 --- 79,382 45,160

Cash transfer expenses 172,910 --- 172,910 147,854

Travel and transportation 55,096 --- 55,096 101,647

Training expenses 60,432 --- 60,432 70,618

Professional fees 116,674 13,000 129,674 145,122

Clothes 126,184 --- 126,184 159,244

Insurances 142,959 --- 142,959 168,130

Bank license fees 210,535 --- 210,535 107,103

Swift fees 246,406 --- 246,406 133,380

Guard and security fees 8,304 --- 8,304 10,829

Fuel 106,018 --- 106,018 137,896

Vehicles expenses 32,779 --- 32,779 37,810

Check books printings 37,113 --- 37,113 103,638

Redemption expenses 86,629 --- 86,629 65,576

Attendance payments for Board of Directors 3,856 --- 3,856 4,525

General Management building expenses 3,268 --- 3,268 10,702

Hospitality 87,667 11,475 99,142 86,363

Traveling 46,343 3,601 49,944 46,069

Miscellaneous expenses 92,734 5,320 98,054 65,155

Subscriptions fees for the increase of capital 56,515 --- 56,515 21,731

Subscriptions and licenses fees --- 51,307 51,307 ---

Foundation expenses --- 18,838 18,838 ---

4,709,751 280,098 4,989,849 4,027,715

Note 33

47

Earning per share34.


2007 2006

USD

Net income for the year 20,588,187 13,903,924

Average number of outstanding shares 59,769,737 36,299,146

Earning per share 0.34 0.38

Cash and cash equivalents35.

At December 31 At December 31Change during December 31

2007 2006 2007

USD

Cash and balances at PMA 125,728,801 68,151,485 57,577,316

Add: Balances at banks and financial institutions maturing within 3 months 359,701,596 230,587,351 129,114,246

485,430,397 298,738,836 186,691,561

Less:

Compulsory reserve at PMA (56,600,478) (42,265,745) (14,334,733)

PMA’s deposits and balances (52,283,342) (43,864,479) (8,418,863)

Banks’ and financial institutions’ deposits and balances (5،387،800) (2,502,617) (2,885,183)

371,158,777 210,105,995 161,052,782

At December 31 At December 31Change during December 31

2006 2005 2006

USD

Cash and balances at PMA 68,151,485 57,417,261 10,734,224

Add: Balances at banks and financial institutions maturing within 3 months 230,587,351 177,237,850 53,349,501

298,738,836 234,655,111 64,083,725

Less:

Compulsory reserve at PMA (42,265,745) (36,189,728) (6,076,017)

PMA’s deposits and balances (43,864,479) (31,446,724) (12,417,755)

Banks’ and financial institutions’ deposits and balances (2,502,617) (1,035,274) (1,467,343)

210,105,995 165,983,385 44,122,610

Notes 34, 35

48

Geographical Distribution of Assets and Liabilities and Off-Balance Sheet Items36.

At December 31

2007 2006

USD

Assets

Liabilities &

Shareholders' Equity

Off-BalanceSheet Items Assets

Liabilities &

Shareholders' Equity

Off-BalanceSheet Items

Inside Palestine 405,913,669 842,086,004 44,222,662 354,386,591 600,052,731 41,563,292

Europe 271,243,179 695,937 4,420,221 165,664,221 --- 6,445,746

Asia 67,362,886 266,008 6,605,864 57,464,701 230,604 6,999,102

Africa 2,598,474 --- 1,767,001 2,257,102 --- 1,755,356

America 50,809,514 4,602,851 1,435,348 9,977,357 --- 1,399,820

Other Countries 49,723,078 --- 978,647 12,805,376 2,272,013 922,536

Total 847,650,800 847,650,800 59,429,743 602,555,348 602,555,348 59,085,852

Capital Adequacy37.

At December 31

2007 2006

USD

Regular capital 2 63,456,635 45,274,604

Risk weighted assets and Off-Balance Sheet items

On -Balance Sheet items 315،029،422 234,382,229

Off-Balance Sheet items 42,677,127 37,351,033

Total 1 357،706،549 271,733,262

Capital adequacy ratio (2)/(1) 17.74 16.66

Notes 36, 37

49

Information about Bank operations sectors38.

Individuals Institutions Treasury Other Year figures

Total Comparative

figures

USD

Main operations sectors information

Total revenue 16,901,981 20,182,727 8,293,086 511,769 45,889,563 34,795,155

Impairment of facilities provision (1,763,927) (587,975) --- --- (2,351,902) (634,314)

Results of operation sectors 15,138,054 19,594,752 8,293,086 511,769 43,537,661 34,160,841

Unallocated expenses on sectors (18,534,664) (15,269,285)

Income before tax 25,002,997 18,891,556

Income tax (4,423,599) (4,987,632)

Net income for the year 20,579,398 13,903,924

Other information

Sector assets 187,430,549 545,536,713 87,311,148 27,372,390 847,650,800 602,555,348

Sector liabilities 633,462,038 121,699,396 --- 2,270,938 757,432,372 546,303,200

Shareholders' equity --- --- --- --- 90,218,428 56,252,148

Depreciation and amortization --- --- --- --- 1,860,532 1,500,042

Secondary operation sector informationThe following table explains the operating income and total assets for BOP according to geographic sector:

Inside Palestine Outside Palestine Total Total

Year figuresComparative

figures Year figuresComparative

figures Year figuresComparative

figures

USD

Income for the year 9,303,487 9,715,883 15,699,510 9,175,673 25,002,997 18,891,556

Assets 405,913,669 354,386,591 441,737,131 248,168,757 847,650,800 602,555,348

Note 38

50

Risk management39.

BOP accepts customer deposits for various periods; BOP seeks to invest these deposits in assets of high quality. BOP is also trying to increase the profit margin by investing in tools and various services according to investment policies (long and short-term) while maintaining sufficient liquidity to fulfill the commitments that come due.

A. Credit riskBOP is trying to avoid exposure of the credit risk through diversification in the activities of finance and investments to avoid the concentration of credit risk to individuals or groups or agents in certain geographical areas and apply policies of BOP credit, BOP also maintains its rights with others by getting guarantees needed in cases requiring return of finance, investment and contingent liabilities. BOP manages the credit risk that may arise from the operations of finance and investment through credit control procedures by setting credit approvals ceilings and setting credit risk control procedures for each client, including banks and financial institutions covering its operations inside and outside the Balance Sheet to control any risks that may be caused to BOP by managing actual credit for the customer within the ceiling approved in advance. BOP is also performing periodic analysis of the client’s ability to pay obligations and a necessary change in the ceiling granted if needed. Note (9) of the fulfilling clarifications illustrates bank financing activities distributed to the economic sectors.

B. Liquidity risk Liquidity risk is the inability of BOP to provide the funding necessary to carry out its obligations in due dates, and to prevent these risks the management is diversifying its sources of funding and management of assets and liabilities and by retaining the balance of cash and cash equivalents and securities negotiable.

C. Market risksMarket risks are arising from fluctuations in interest rates, currency exchange rates and stock prices. The Board of Directors set limits on the value of acceptable risk, and control is done by a special committee on a weekly basis.

D. Interest rate risksThese risks arise from the likely impact of changes in interest rates on the value of financial assets. Moreover, BOP adopts the assets - liabilities compatibility principle and the suitability of maturities to narrow gaps through categorizing assets and liabilities into various maturities or price review maturities. BOP manages these risks through reviewing interest rates on assets and liabilities within a specified strategy of risks management.

E. Foreign exchange currency riskForeign exchanges and derivatives trading for BOP account are managed by a very limited proprietary foreign exchange trading limit. However, treasury activities are primarily focused towards meeting the requirements of customers to manage their foreign exchange exposure. These dealings in the financial markets are matched by equal treatment of customers.BOP’s assets are mainly financed by the same currency that is dealt with; this is for decreasing BOP’s risk toward the foreign exchange. On December 31, 2007, BOP account was not over-drafted toward the foreign exchange in a material amount. There is segregation between the customers and the control office while the positions are continuously and independently monitored.

F. Operating risks and other risksOperational risk is the risk of direct or indirect losses that are arising from the failure of automated systems, or base of operations or infrastructure individuals or any other types of risks with the impact on the operational risks. BOP has cut this risk through a combination of specialized technical and follows all the requirements of regulations and separate departments of internal control and management of risks so as to ensure the availability of systems of measurement and control and report on all the elements of the operational risks.

Note 39

51

BOP is facing a group of other risks including regulation, legal and reputation risks. Regulation risks are managed through policies and procedures. Legal risks are managed through the efficient use of legal advisers internally and externally. The reputation risk is managed through continuous examination of the matters that affect the reputation of BOP and the issuance of instructions and policies when circumstances warrant.

Interest price elasticity as of December 31, 200740.

Within 3 months

From 3 to 6Months

From 6 to 12Months

Over1 year

Inelastic Interest Total Interest

Price

USD %

Assets:

Cash and balances at Palestinian Monetary Authority (PMA) 70,886,370 --- --- --- 54,842,431 125,728,801 ---

Balances at banks and financial institutions 359,701,596 --- --- --- --- 359,701,596 5.35

Trading financial assets --- --- --- --- 3,264,380 3,264,380 ---

Available for sale financial assets --- --- --- --- 10,046,262 10,046,262 ---

Held-to-maturity investments 9,167,842 --- 11,052,186 53,834,437 --- 74,054,465 4.80

Credit facilities – net 104,442,282 21,001,520 19,152,125 11,225,444 87,766,142 243,587,513 9.50

Real – estate investments --- --- --- --- 1,237,685 1,237,685 ---

Property and real-estate – net --- --- --- --- 24,571,510 24,571,510 ---

Other assets --- --- --- --- 5,458,588 5,458,588 ---

Total assets 544,198,090 21,001,520 30,204,311 65,059,881 187,186,998 847,650,800

Liabilities and shareholders’ equity:

PMA’s balances and deposits 52,283,342 --- --- --- --- 52,283,342 5.30

Banks’ and financial institutions’ balances and deposits 5,387,800 --- --- --- --- 5,387,800 4.50

Customers’ deposits 404,805,273 30,125,543 75,497,223 --- 138,734,225 649,162,264 4.20

Cash margins 24,289,362 2,932,685 3,249,351 --- --- 30,471,398 ---

Miscellaneous provisions --- --- --- --- 4,150,753 4,150,753 ---

Tax provisions --- --- --- --- 7,319,500 7,319,500 ---

Other liabilities --- --- --- --- 8,657,315 8,657,315 ---

Shareholders’ equity --- --- --- --- 90,218,428 90,218,428 ---

Total liabilities and shareholders’ equity 486,765,777 33,058,228 78,746,574 --- 249,080,221 847,650,800

Gap in the accounts within the financial position statement 57,432,313 (12,056,708) (48,542,263) 65,059,881 (61,893,223)

Note 39 (cont.). Note 40

52

Maturity41. of assets and liabilities outstanding as of December 31, 2007

Within 3 months

From 3 to 6Months

From 6 to 12Months

Over1 year Unspecified Total

USD

Assets:

Cash and balances at Palestinian Monetary Authority (PMA) 69,128,323 --- --- --- 56,600,478 125,728,801

Balances at banks and financial institutions 359,701,596 --- --- --- --- 359,701,596

Trading financial assets --- --- --- --- 3,264,380 3,264,380

Available for sale financial assets --- --- --- --- 10,046,262 10,046,262

Held-to-maturity investments 9,167,842 --- 11,052,186 53,834,437 --- 74,054,465

Credit facilities – net 104,442,282 21,001,520 19,152,125 11,225,444 87,766,142 243,587,513

Real – estate investments --- --- --- --- 1,237,685 1,237,685

Property and real-estate – net --- --- --- --- 24,571,510 24,571,510

Other assets --- --- --- --- 5,458,588 5,458,588

Total assets 542,440,043 21,001,520 30,204,311 65,059,881 188,945,045 847,650,800

Liabilities and shareholders’ equity:

PMA’s balances and deposits 52,283,342 --- --- --- --- 52,283,342

Banks’ and financial institutions’ balances and deposits 5,387,800 --- --- --- --- 5,387,800

Customers’ deposits 404,805,273 30,125,543 75,497,223 --- 138,734,225 649,162,264

Cash margins 24,289,362 2,932,685 3,249,351 --- --- 30,471,398

Miscellaneous provisions --- --- --- --- 4,150,753 4,150,753

Tax provisions --- --- --- --- 7,319,500 7,319,500

Other liabilities --- --- --- --- 8,657,315 8,657,315

Shareholders’ equity --- --- --- --- 90,218,428 90,218,428

Total liabilities & shareholders’ equity 486,765,777 33,058,228 78,746,574 --- 249,080,221 847,650,800

Gap in the accounts within the financial position statement 55,674,266 (12,056,708) (48,542,263) 65,059,881 (60,135,176)

Note 41

53

Related party transactions42.

BOP enters through its usual business transactions with the major shareholders, board members, senior management and their affiliated companies, and who are with the relationship spurred by relevant definitions contained in Article (16) of banking law. In this regard, credit facilities provided and interest rate on these facilities are taken in to consideration in addition to the delinquent credit facilities and provisions taken against them.Particulars of transactions with related parties are set in the below table:

At December 31

2007 2006

USD

Balance Sheet items:

Direct credit facilities 1,388,831 959,596

Deposits and cash margins 3,200,160 135,304

Off Balance Sheet items:

Indirect credit facilities 2,653,365 330,674

Income Statement

Interest and commissions income 152,391 107,545

Deposits at BOP and cash margin pertaining to related parties with an amount of USD 2,221,337 is relating to affiliated companies as of December 31, 2007. In addition, an amount of USD 2,540,579 included in the indirect facilities pertaining to related parties is relating to affiliated companies as of December 31, 2007.

Court cases43.

The number of court cases raised by BOP, as plaintiff, is 423 as of December 31, 2007 for claims in the amount of USD 11,046,886, and 477 as of December 31, 2006 for claims in the amount of USD 8,979,070. On the other side, BOP as a defendant has been sued with 21 court cases with total claims of USD (3,632,928) as of December 31, 2007 and 22 court cases with total claims of USD 1,290,434 as of December 31, 2006. Based on the opinion of BOP’s legal consultants, adequate provisions have been made to meet those cases.

Comparative amounts44.

Certain comparative figures for the previous year have been reclassified to be in conformity with the current year presentation. These reclassifications don’t affect net shareholders equity.

Notes 42, 43, 44

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West Bank

General ManagementHead Office Ramallah Ain Misbah Nazlet Al Mahkamah P.O.Box 471

Tel: 02-2965010/3 Fax: 02-2964703

Ramallah Tel: 02-2985921/4 Fax: 02-2985920

El Irsal (Ramallah) Tel: 02-2966860/3 Fax: 02-2966864

Tanus (Ramallah) Tel: 02-2972170/1 Fax: 02-2972172

Deir Dibwan (Ramallah) Tel: 02-2897144 Fax: 02-2897143

Hebron Tel: 02-2250001/2 Fax: 02-2250003/4

Dura Tel: 02-2285402/5 Fax: 02-2285422

Bethlehem Tel: 02-2765515/6 Fax: 02-2765517

Jericho Tel: 02-2321083/4 Fax: 02-2321085

Al Karamah Border Telefax: 02-9944640

Nablus Tel: 2/1/09-2382030 Fax: 09-2382923

Hisba (Nablus) Tel: 09-2311460/1 Fax: 09-2311922

Toubas Tel: 09-2573801/2/3 Fax: 09-2573804

Jenin Tel: 04-2439521 Fax: 04-2439520

Qabatia Tel: 04-2511521/2 Fax: 04-2511520

Tulkarem Tel: 09-2686622/4 Fax: 09-2686625

Qalqilia Tel: 09-2947921/3 Fax: 09-2947924

Azoun Tel: 09-2902941/2 Fax: 09-2902943

Salfeet Tel: 09-2519950/1/2 Fax: 09-2519953

Gaza

General Management Gaza Omar Al Mukhtar St. Al Jundi Al Majhoul Sq. P.O.Box 50

Tel: 08-2843059 Fax: 08-2846025

Remal (Jundi) Tel: 08-2843039/49 Fax: 08-2861755

Remal (Al Sarayah) Tel: 08-2835866/77 Fax: 08-2865787

Al Mintar/ Karni Telefax: 08-2803466

Main Branch (Gaza) Tel: 08-2823272/7 Fax: 08-2865667

Omar Mokhtar (Gaza) Tel: 08-2835411 Fax: 08-2865786

Jabalia Tel: 08-2455068/9 Fax: 08-2456180

Al Naser Tel: 08-2854711/2 Fax: 08-2854717

Al Nussirat Tel: 08-2555944 Fax: 08-2555922

Deir El Balah Tel: 08-2532032/3 Fax: 08-2532031

Khan Younis Tel: 08-2067320/30 Fax: 08-2052932

Rafah Tel: 08-2138550/5 Fax: 08-2136071

Rafah Crossing Tel: 08-2139121 Fax: 08-2139122

Branches Network

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Documents

Dr. Hani Hashim Shawa: 1942-2007 - Bank of Palestine · Dr. Hani Hashim Shawa, who passed away in April of last year and whom we greatly miss. Dr. Shawa played a pivotal role in leading